Free Trade and Economic Development

Since the time when Smith (1776/2009) first asserted the notion of free trade as an advantageous alternative to earlier mercantilist system, and Ricardo (1817/1965) formulated the concept of comparative advantage as a means for greater economic development, a dispute has been ongoing on the desirability of completely free-trade system of international economic relations.

Smith (1776/2009) contended that the establishment of protective tariffs on foreign goods stifled competition and was conducive to the development of monopolies on domestic market, leading to general price increases (1776/2009, p. 444). He objected to the protective treatment of certain branches of domestic industry, believing that this led to the distortion of normal capital accumulation dynamics (Smith, 1776/2009, p. 348). In general, he considered it inevitable that any artificial constraints on a free flow of goods would hamper public interest.

Ricardo (1817/1965) viewed free trade as a necessary remedy to effects of the law of diminishing returns, which caused the rise in rents and the fall in industrial profits (1817/1965, pp. 52-53). Accordingly, he regarded an uninhibited flow of consumption goods as an expedient means of alleviating crises of under-consumption (Dunkley, 2004, p. 20).

At the same time, the idea of free trade was an integral part of Ricardian concept of comparative advantage, embodying the general benefit reaped by appropriate economic specialization (Huang, 2003, p. 16). As a general rule, the nations that would be most specialized in one or another branch of industry would accrue additional revenues by exploiting this specialization to their benefit. The differences in labor-values of the same product in various national economies would allow some of them to acquire greater amounts of certain goods through exchange rather than domestic production.

Ricardian concept of free tradenecessity due to the comparative advantagesexistence led to further development of free trade theory. However, ample critique of the notion of desirability of free trade was in place as well.

One of most potent and well-known counterarguments to free trade is a so-called infant industry argument, most eloquently presented by Mill (1848/1985). He believed that protective duties could be necessary in order to facilitate the development of an industry suitable for the conditions of the respective country, yet burdened by the foreign industries' competition(Mill, 1848/1985, p. 283). Nevertheless, this argument was criticized by the free trade proponents on the ground that the protection system, once established, tended to perpetuate itself.

The second substantive argument for limiting the scope of free-trade practices is a potential of revenue generating. The customs duties and protective tariffs allow the states to increase their revenues without the costs of domestic discontent associated with the increases in income or value added taxes. Still, excessive increases in tariffs might lead to the fall in imports or the increase in imported goods' prices on the domestic market, thus diminishing revenues of the states relying too heavily on tariffs in their fiscal policies (Huang, 2003, p. 18).

One of more sound criticisms of free-trade ideas is a reference to the necessity of labor market protection (Daly, 1992). Nevertheless, this argument is somewhat flawed, as the protectionist measures are more likely to export unemployment to the other nations, and in any case the guarantee of freedom of labor force movement would be much better solution to that problem than a nationalist protectionism.

Accordingly, I believe that free trade itself is not a guarantee of harmonious economic development, though it is not to blame for imbalances in economic development caused by structural adjustments at the global level. It is only an expression of more general laws of international competition, the change whereof would require much more concerted efforts than ‘simple’ protectionist measures.